Momentum Indicators

What are Momentum Indicators?

The Momentum indicator compares where the current price is in relation to where the price was in the past. How far in the past the comparison is made is up to the technical analysis trader. The calculation of Momentum is quite simple (n is the number of periods the technical trader selects):

• The current price minus the price n-periods ago

Hence, if the current price is higher than the price in the past, then the Momentum indicator is positive. In contrast, when the current price is lower than the price in the past, then the Momentum indicator is negative.

The momentum indicator identifies when the price is moving upwards or downwards, and also by how much the price is moving upwards or downwards. When the momentum indicator is above 0 (zero), the price has upwards momentum, and when the momentum indicator is below 0 (zero) the price has downwards momentum. The momentum indicator can be used on its own, or as part of a larger trading system.

Popular Momentum Indicators Explained

1. Stochastic Oscillator (SO) 

- compares a security’s closing price to its price range over a given period of time. The theory behind this indicator is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low.

2. Relative Strength Index (RSI) 

- compares the magnitude of recent gains in price to recent losses in an attempt to determine overbought and oversold conditions of a security.

The RSI, on a scale of 0-100, indicates that a stock is overbought when it is over 70 and oversold when it is below 30. Because large surges and drops in the price of a security will create false buy or sell signals the RSI works best when it is used in conjunction with short-term moving average crossovers such as the Stochastic Oscillator to confirm a directional shift.

3. StochRSI 

- created by applying the Stochastic Oscillator to the Relative Strength Index values rather than standard price data thereby giving the trader a better idea of whether the current RSI value is overbought or oversold – a measure that becomes specifically useful when the RSI value is confined between its signal levels of 30 and 70.

4. TRIX 

- displays the percent rate-of-change of a triple exponentially smoothed moving average of a security’s closing price and is designed to filter out stock movements that are insignificant to the larger trend of the security.

The user selects a number of periods (such as 15) with which to create the moving average, and those cycles that are shorter than that are filtered out. TRIX is also a leading indicator and can be used to anticipate turning points in a trend through its divergence with the security’s price.

5. Commodity Channel Index (CCI)

- an oscillator which quantifies the relationship between the security’s price, a moving average of the security’s price, and normal deviations from that average to determine when a security has been overbought or oversold.

The CCI, when used in conjunction with other oscillators, can be a valuable tool to identify potential peaks and valleys in the security’s price, and thus provide investors with reasonable evidence to estimate changes in the direction of price movement of the security.

6. Price Rate of Change (ROC)

- measures the percentage rate of change, indicating the strength of the momentum, between the most recent price and the price over “x” periods (the narrower the better) thereby identifying bullish or bearish divergences. As such, the ROC is able to forecasts sooner than almost any other indicator an upcoming reversal of a trend and whether or not a security’s price action is created by those over-buying or over-selling it. A number other than zero (a personal choice) can be used to indicate an increase in upward momentum and a number less than zero to indicate an increase in selling pressure.

Thank You !